The Serbian government will probably meet the International Monetary Fund’s agreed fiscal gap target of 26 billion dinars ($309.1 million) by the end of March, while compliance with a full-year goal remains uncertain, FREN research institute said today.
Serbia’s fiscal gap will probably reach 5.2 percent of gross domestic product at the end of 2012, while the public debt-to-GDP ratio would top 50 percent, if the government that takes office after May 6 parliamentary elections keeps policies unchanged rejecting spending cuts, said Milojko Arsic, the chief macro-economist of the Belgrade-based FREN research institute.
“It remains to be seen whether the government sticks with agreed targets in the second half of the year,” he said at a news conference in Belgrade today.
Heavily reliant on the domestic market for borrowing, Serbia needs to maintain fiscal discipline and reduce fiscal financing risks by complying with nominal deficit targets of 26 billion dinars at the end of March and 61 billion dinars through June, the IMF said on Feb. 16, adding that the targets reflect lower revenue resulting from weaker economic growth.
The IMF and Serbia agreed to freeze a $1.3 billion precautionary loan program last month, leaving it up to the new government to restore it or to agree a new deal. Under the frozen deal, Serbia pledged to end 2012 with a fiscal gap of 4.25 percent of GDP. Its self-imposed fiscal rules limit the public debt to 45 percent of GDP.
Spending Increases
It is “impossible” to make reliable forecasts for the full-year budget and the deficit, because Serbia is heading for elections with both the government and opposition parties pledging tax cuts and no public spending reductions, Arsic said.
Opposition groups and the government are proposing a cut of personal income and social and health insurance taxes to 40 percent from 62 percent, a minimum-wage increase by nearly 13 percent, along with exemption of baby food and staples from the value-added tax, and an increase in farming subsidies.
All of these proposals can only be compensated by a 2 percentage-point value-added tax increase, Arsic said. Serbia now applies 8 percent value-added tax on staples and 18 percent on all other products and services.
“A revenue cut and an increase in spending contradict reality and that could lead to a crash, to a Greek scenario,” said Arsic, who is also a member of the central bank’s advisory board. To make sure the country avoids a crash, the government needs to prepare policies that would cut the fiscal gap to between 2.5 percent and 3 percent of GDP in 2013, he said.
FREN, whose research has been backed by the United States Agency for International Development, also said that Europe’s sovereign debt crisis and shrinking economic growth will weigh on demand for the Serbian exports and economic expansion.
The economy would need to show constant growth throughout the year in order to finish 2012 with “zero growth” and the country needs foreign direct investment equivalent to 3 percent to 4 percent of GDP or worth between 1 billion euros ($1.31 billion) and 1.2 billion euros along with “an increase in net exports to prevent recession,” Arsic said.
“The dinar has depreciated as a result of the widening current account deficit, not so much because of a lack of confidence,” Arsic said, adding the weakening dinar would back exports.
Serbia’s current account deficit rose to 9.1 percent of GDP at the end of 2011 compared with its desired “equilibrium” level of around 6 percent of GDP.
The weaker dinar has been weighing on both corporate and retail clients’ capacity to service their debts, overwhelmingly linked to foreign currencies. The currency risk and the resulting credit default risk combined with a proposed minimum wage increase will reduce job creation, at a time when the unemployment has reached 24.4 percent, Arsic said.
Addressing a separate news conference, Nebojsa Atanackovic, the chairman of the Serbian Association of Employers said the group may withdraw from a minimum-wage increase agreement with the government. The change, effective from April 1, will fuel production costs by as much as 200 million euros a year, according to the association’s estimates.
“What’s the purpose of giving workers a high hourly rate if you then push dozens, maybe hundreds of struggling companies over the edge” and force them to file for bankruptcy, Atanackovic said. “This will only increase unemployment.”
Of 1.7 million people at work, the wage increase will affect 350,000 workers who live on a minimum wage that is set to rise to 20,010 dinars a month.
Source businessweek
